By: Mallory McKenzie and Ryan McCrum – From a conceptual standpoint, one might think there is a difference between selling an item and charging for a leased item that was never returned.  However, a recent decision from the ITC held that charging fees for unreturned rental equipment qualifies as a sale, either contractually or through conversion, for purposes of Section 337.  Certain Digital Video Receivers and Related Hardware and Software Components, Inv. No. 337-TA-1103, Order No. 47 (June 3, 2019).

The investigation relates to accusations by Rovi that Comcast violated Section 337 by improperly importing cable boxes and selling them after importation.  Comcast had a policy of ‘leasing’ cable boxes to its cable subscribers, which the customer was required to return upon termination of their cable services.  If the customer did not return the cable box, Comcast charged an “unreturned equipment fee.”

In response to the parties cross motions for summary determination on the issue, ALJ McNamara held that, under the circumstances of the case, charging a fee for the unreturned rental equipment amounted to a sale after importation under Section 337.  The ALJ based her decision off of a plain meaning definition of a sale—the “transfer of property or title for a price.” Under that definition, she found that Comcast was engaged in sales of its cable boxes: it charged a “retail price” fee in exchange for customers keeping the equipment. Of significance to the ALJ was the fact that the fee covered more than just the cost of the rental equipment, resulting in a profit to Comcast.  Comcast’s arguments about the policy being a liquidated damages clause and how it did not make business sense to try and recover the cable boxes themselves were unpersuasive.  The ALJ further found that if not a contractual sale, the policy resulted in a “forced sale” or conversion, because the customer’s intentional exercise of control over what was Comcast’s property “so seriously interfere[d] with the right of another to control that property” that the customer was required to pay the full value of the property.

Takeaway

Charging fees for unreturned rental equipment can qualify as a sale for the purposes of Section 337, whether contractually or through conversion. As a result, these activities are subject to potential ITC remedial orders, including a cease and desist order (CDO).  Entities that deal with renting items should consider evaluating their policies regarding unreturned equipment and reconsider what makes the most commercial sense in safeguarding against lost value.

The following two tabs change content below.
Ryan McCrum, who co-chairs the Firm's intellectual property ITC practice, has nearly 20 years of experience handling high-stakes patent litigation. He has led teams from the initial filing of a complaint all the way through jury and bench trials. He has extensive experience examining witnesses of all types at trial, arguing claim construction and summary judgment hearings, and handling matters through appeal.